This invention relates generally to vehicle warranty insurance policy preparation and sale and more particularly to a system and method for automated risk-based pricing of such policies.
Typically, vehicle warranty insurance policy pricing, preparation and sale involve assessing the expected lifetime cost of an issued policy for a particular vehicle. The expected cost is generally determined as a function of several variables such as the make, model and year of the vehicle as well as the mileage of the vehicle at the time of submitting an application for a vehicle warranty insurance policy. This expected cost determination is mathematically complex and requires a sophisticated computational capability in order to perform the relevant calculations.
In addition to being mathematically complex, the above-described expected cost determination is not very competitive for the vehicle warranty insurer. In particular, the current expected cost determination does not spread the costs uniformly amongst its customers, which results in low risk customers being overcharged, while high risk customers are undercharged. The market response is that the population of high risk customers will increase because they are undercharged and the population of low risk customers will decrease because they are overcharged. In order to remain competitive, the vehicle warranty insurer must try to readjust the prices charged to compensate for the undercharged high risk customers. Generally, the vehicle warranty insurer will try to readjust the average price charged by implementing a uniform price increase. This causes a decrease in the amount of high risk customers, however, readjusting the average price causes the low risk customer to be overcharged even more. Another alternative for the vehicle warranty insurer is to simply eliminate the entire population of high risk customers, however, this also results in a imbalance of low risk and high risk customers. The vehicle warranty insurer cannot be competitive with either of these approaches because it cannot grow its business. Eventually, the vehicle warranty insurer will lose its market share and may even go bankrupt.
Therefore, there is a need for a system and method that can price vehicle warranty insurance policies that vary for low and high risk customers so that a vehicle warranty insurer can increase its business. Also, this system and method must be easy to use so that the vehicle warranty insurance personnel can understand and use it.